February 27, 2013

TD’s Nally: Thinking More About the Future of RIAs Than Their Past

Let me just admit right up front that it was one of those streaming videos that just rubbed me the wrong way from the start. In fact, right from the headline: “RIA 2.0.”

2.0? Really?

As if the independent advisory industry was just launched a couple of years ago? I had to hit the pause button. But I thought it might be entertaining to hear what this obvious youngster had to say about this “new” profession. And I’m glad I did, because even though TD Ameritrade Institutional President Tom Nally might be a little light on his history, in his 3½ minute Investment News interview from the TD Institutional conference, he pretty much nailed exactly where the advisory profession is now, and the challenges it faces to get to the next level.

(Editor's Note: Okay, I can’t help myself: see also my March 2013 Investment Advisor article on Nally, Skip Schweiss and Jim Dario of TDAI.—Jamie Green) 

But first, let’s clear up the history. While the independent advisory industry goes back at least to the early 1970s, with CEO John Keeble III’s Financial Service Corp (now FSC Securities) in Atlanta to service independent contractor inancial planners, Tom Nally did call his talk RIA 2.0. While there were certainly a few independent RIAs before then, the founding of NAPFA for fee-only RIAs in 1983 is as good a date as any for the beginnings of the independent RIA industry, so let’s call that RIA 1.0. 

In the 30 years since then, while some folks could probably make a case for more, I count four iterations of the industry in addition to current one that Nally talks about:

  • 2.0: The creation of Schwab Financial Advisor Services in 1987 (now called Schwab Advisor Services), which gave advisors the ability to have fees deducted directly from client accounts, making direct payment of advisors relatively painless and automatic for the clients, and much better business for advisors.
  • 3.0: The transition from financial planning as the primary client service to asset management. This occurred between the Black Monday market crash in 1987 and the recession of 1991. While independent RIAs still provided planning services, they charged based on AUM, creating the modern independent firm and foreshadowing the demise of the Wall Street brokerage model. 
     
  • 4.0: The widespread realization toward the end of the 1990s that client assets under management have substantial value. This transformed independent advice from a cottage industry into ongoing businesses with transferable values, and an M&A industry to support it. 
     
  • 5.0: Once it became clear that independent advisors (with their client AUM) were creating businesses worth multiples of revenues (currently around 3.5 x, which in many cases translates into millions of dollars), even the outrageous payouts and bonuses paid by Wall Street firms couldn’t compete. Beginning in the early part of the new millennium—and snowballing after the dot.com crash—breakaway brokers flooded into the independent RIA ranks, bringing billions of dollars in client AUM with them. That movement required a major ramping up of the independent service model to match the sophistication of brokerage firms they left behind.

So when Tom Nally told us that “the entire RIA business has matured over the past 10 years, and an entire industry has grown up to support the RIAs. It was kind of a cottage industry to start out, but this is really the first generation to see it as a business,” it was a shame that he ignored the advancements that independent RIAs have made over the preceding 20 years to bring them to this level of success. Still, he went on to recognize the need for better professional training, announcing that TD Ameritrade Institutional would award 10 financial planning scholarships worth $5,000 annually to students, and an annual $50,000 grant to the financial planning educational program “that best furthers excellence in advisor education. As an industry, we need to do a better job of fostering the next generation of advisors.” 

Then he underscored the need for today’s advisory firms to run more efficiently so that they can provide a higher level of client services. 

“Investors are getting more educated about asking the right type of questions about their advisors,” he said. When investors are presented with the choice of the brokerage model or the fiduciary model, “they’ll take the fiduciary model every time. Advisors need to be prepared to handle this increased demand. We see our role as helping advisors run better businesses.” 

That’s about the best description of the job of a custodian that I’ve heard yet. Perhaps a little ignorance of history isn’t such a bad thing. 

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